Managerial Accounting 2002 e Belverd E Needles Jr

Chapter 13 Quality Management and Measurement Copyright © Houghton Mifflin Company. All rights reserved.

LEARNING OBJECTIVES 1. Define cost management, describe a management information system, and explain how it enhances the management cycle. 2. Define total quality management and identify and compute the costs of quality for products and services. 3. Use nonfinancial measures of quality to evaluate operating performance. Copyright © Houghton Mifflin Company. All rights reserved. 3

LEARNING OBJECTIVES 4. Discuss the evolving concept of quality. 5. Identify the awards and

Management Information Systems OBJECTIVE 1 Describe a management information system and explain how it

Management Information Systems • A management information system (MIS) is a management reporting system that identifies monitors maintains continuous, detailed analyses of a company’s activities and provides managers with timely measures of operating results. Copyright © Houghton Mifflin Company. All rights reserved. 6

Management Information Systems • Primary focus of an MIS is on the management of activities (not costs). • Nonvalue-adding activities are highlighted. • Individual customer profitability is analyzed. • Resource usage and each activity cost is identified. • Managerial decision making is fostered, leading to continuous improvement. Copyright © Houghton Mifflin Company. All rights reserved. 7

Management Information Systems • An MIS may consist of separate or linked systems. • An MIS may be a fully integrated data-base system: an enterprise resource planning (ERP) system. • An ERP system combines the management of all major business functions: purchasing, manufacturing, marketing, sales, logistics, order fulfillment, accounting, human resources, etc. • Managerial decision making is fostered, leading to continuous improvement. Copyright © Houghton Mifflin Company. All rights reserved. 8

The Management Cycle 1. Planning stage: Managers use the MIS database formulating strategic plans, making forecasts, and preparing budgets. 2. Executing stage: Managers use the MIS database for implementing decisions about personnel, resources, and activities to minimize waste and improve quality. Copyright © Houghton Mifflin Company. All rights reserved. 9

The Management Cycle 3. Reviewing stage: Managers track financial and nonfinancial performance measures for evaluating major business functions. Copyright © Houghton Mifflin Company. All rights reserved. 10

The Management Cycle 4. Reporting stage: Managers generate customized reports to evaluate performance and

The Management Cycle and a Management Information System Copyright © Houghton Mifflin Company. All

Discussion Q. What are some of the activities included in a cost management system? A. 1. Purchasing 2. Manufacturing 3. Marketing 4. Sales 5. Logistics 6. Order fulfillment 7. Accounting 8. Human resources Copyright © Houghton Mifflin Company. All rights reserved. 13

Accounting for Product and Service Quality OBJECTIVE 2 Define total quality management and identify and compute the costs of quality for products and services. Copyright © Houghton Mifflin Company. All rights reserved. 14

Total Quality Management • Total quality management (TQM) exists when all business functions work together to achieve quality. • Quality means satisfying the customer the first time. • Costs of quality exist when quality is achieved and when it is not achieved. Copyright © Houghton Mifflin Company. All rights reserved. 15

Costs of Quality • The costs of conformance include prevention costs and appraisal costs. • The costs of nonconformance include internal and external failure costs. Copyright © Houghton Mifflin Company. All rights reserved. 16

Financial Measures of Quality Costs of Conformance to Customer Standards Prevention costs Technical support for vendors Integrated system development Quality improvement projects Quality training of employees Design review of products and processes Quality-certified suppliers Quality circles Preventive maintenance Statistical process control Process Engineering Appraisal costs Inspection of materials, processes, Maintenance of test equipment and machines Quality audits of products and End of process sampling and processes testing Vendor audits and sample testing Field testing Copyright © Houghton Mifflin Company. All rights reserved. 17

Financial Measures of Quality Costs of Nonconformance to Customer Standards Internal failure costs Scrap and rework Reinspection and retesting of rework Quality-related downtime Scrap disposal losses Failure analysis Inventory control and scheduling Downgrading because of defects External failure costs Lost sales Restoration of reputation Warranty claims and adjustments Customer complaint processing Returned goods and replacements Investigation of defects Product recalls Product-liability settlements Measures of quality Total costs of quality as a percentage of net sales Ratio of costs of conformance to total costs of quality Ratio of costs of nonconformance to total costs of quality Costs of nonconformance as a percentage of net sales Copyright © Houghton Mifflin Company. All rights reserved. 18

Financial Measures of Quality Total costs of quality as a percentage of net sales Ratio of costs of conformance to total costs of quality Ratio of costs of nonconformance to total costs of quality Costs of nonconformance as a percentage of new sales Copyright © Houghton Mifflin Company. All rights reserved. 19

Discussion Q. What are the four cost categories in total quality management? A. 1. Prevention costs. 2. Appraisal costs. 3. Internal failure costs. 4. External failure costs. Copyright © Houghton Mifflin Company. All rights reserved. 20

Nonfinancial Measures of Quality OBJECTIVE 3 Use nonfinancial measures of quality to evaluate operating

Nonfinancial Measures of Quality • A business should establish a system to detect poor quality early. • Nonfinancial measures help determine the degree of quality achieved. • A commitment to ongoing improvement enhances quality and ultimately maximizes the financial return from operations. Copyright © Houghton Mifflin Company. All rights reserved. 22

Nonfinancial Measures • Nonfinancial measures of quality include: • Measures of product design quality. • Measures of vendor performance. • Measures of production performance. • Measures of delivery cycle time. • Measures of customer satisfaction. Copyright © Houghton Mifflin Company. All rights reserved. 23

Measures of Product Design Quality • Computer-aided design (CAD) helps detect product design flaws.

Measures of Vendor Performance • Companies analyze vendors to determine which are most reliable, furnish high-quality goods, deliver on time, and charge competitive prices. Copyright © Houghton Mifflin Company. All rights reserved. 25

Measures of Production Performance • Companies adopt computerintegrated manufacturing (CIM) systems to evaluate performance of production equipment and to evaluate performance of maintenance personnel. Copyright © Houghton Mifflin Company. All rights reserved. 26

Measures of Delivery Cycle Time • Delivery cycle time (time between accepting an order and final delivery of the product or service) consists of: • Purchase order lead time (time to order and receive materials). • Production cycle time (time to make the product). • Delivery time (time between completion of product and its receipt by the customer). Copyright © Houghton Mifflin Company. All rights reserved. 27

Measures of Customer Satisfaction • Customer follow-up helps evaluate customer satisfaction. • Companies may develop their own customer satisfaction indexes. Copyright © Houghton Mifflin Company. All rights reserved. 28

Nonfinancial Measures of Quality Measures of Product Design Quality Product design flaws Number and types of design defects detected Average time between defect detection and correction Number of unresolved design defects at time of product introduction Copyright © Houghton Mifflin Company. All rights reserved. 29

Nonfinancial Measures of Quality Measures of Vendor Performance Vendor quality Defect-free materials as a percentage of total materials received; prepared for each vendor Vendor delivery Timely deliveries of materials as a percentage of total deliveries; prepared for each vendor Copyright © Houghton Mifflin Company. All rights reserved. 30

Nonfinancial Measures of Quality Measures of Production Performance Production quality Number of defective products per million produced Parts scrapped Number and type of materials spoiled during production Equipment utilization rate Productive machine time as a percentage of total time available for production Amount of time each machine is idle Machine downtime Machine maintenance time Amount of time each machine is idle for maintenance and upgrades Copyright © Houghton Mifflin Company. All rights reserved. 31

Nonfinancial Measures of Quality Measures of Delivery Cycle Time On-time deliveries Shipments received by promised date as a percentage of total shipments Orders filled as a percentage of total orders received Average process time Average time required by production to make a product available for shipment Average setup time Average amount of time elapsed between the acceptance of an order and the beginning of production Purchase order lead time Time it takes for materials to be ordered and received so that production can begin Production cycle time Time it takes to make a product available for shipment Delivery time Time between the completion of a product and its receipt by the customer Delivery cycle time Time between the acceptance of an order and the final delivery of the product or service (purchase order lead time + production cycle time + delivery time) Waste time Production cycle time – average process time – average setup time Production backlog Number and type of units waiting to begin processing Copyright © Houghton Mifflin Company. All rights reserved. 32

Nonfinancial Measures of Quality Measures of Customer Satisfaction Customer complaints Warranty claims Returned orders Number and types of customer complaints Number and causes of claims Shipments returned as a percentage of total shipments Copyright © Houghton Mifflin Company. All rights reserved. 33

Measuring Service Quality • Many of the quality cost categories and nonfinancial measures can be applied to service organizations. • Flaws in service design lead to poor-quality services. • Poor service development leads to internal and external failure costs. Copyright © Houghton Mifflin Company. All rights reserved. 34

Discussion Q. What five areas of nonfinancial measures can help determine the degree of quality achieved? A. 1. Product design quality. 2. Vendor performance. 3. Production performance. 4. Delivery cycle time. 5. Customer satisfaction. Copyright © Houghton Mifflin Company. All rights reserved. 35

The Evolving Concept of Quality OBJECTIVE 4 Discuss the evolving concept of quality. Copyright

The Evolving Concept of Quality • In the past, the benefits of quality were weighed against the costs of improving quality. • A “return on quality” was required. • In the 1980 s, Deming and others promoted Total Quality Management (TQM). • Companies came to believe that quality gave companies a competitive edge. • Quality control methods were implemented to eliminate defects in product design and manufacture. Copyright © Houghton Mifflin Company. All rights reserved. 37

The Evolving Concept of Quality • Companies expanded quality management to include nonmanufacturing processes. • Benchmarking compares the quality of a process with a parallel process at the bestin-class company (from any industry). • Process mapping diagrams process inputs, outputs, constraints, and flows to identify unnecessary efforts and inefficiencies. • Service businesses also seek to maximize customer satisfaction. Copyright © Houghton Mifflin Company. All rights reserved. 38

The Evolving Concept of Quality • The concept of quality evolves to fulfill customer needs and expectations as the business environment changes. • Quality dimensions include freedom from defects, dependability, prestige, good taste, customer expectations, innovation. • The goal is customer satisfaction and customer retention. Copyright © Houghton Mifflin Company. All rights reserved. 39

Full Cost Profit Margin OBJECTIVE 5 Identify the awards and organizations that promote quality.

Recognition of Quality Awards to recognize and promote the importance of quality include: • The Deming Application Prize—awarded by the Japanese Union of Scientists and Engineers. • The Malcolm Baldrige Quality Award— awarded to U. S. organizations for achievements in quality and business performance excellence. The International Standards Organization (ISO) has developed ISO 9000, setting quality management and quality assurance standards. Copyright © Houghton Mifflin Company. All rights reserved. 41

OK, Let’s Review 1. Describe a management information system, and explain how it enhances the cycle. 2. Define total quality management and identify and compute the costs of quality for products and services. 3. Use nonfinancial measures of quality to evaluate operating performance. Copyright © Houghton Mifflin Company. All rights reserved. 42